Saturday, February 3, 2007

Delong on Inequality

Delong offers a good retort of the issue of inequality but I quibble a bit with this

This kind of inequality should be a source of concern. Bill Gates, Paul Allen, Steve Ballmer, and the other hundred-millionaires of Microsoft are brilliant, hard-working, entrepreneurial, and justly wealthy. But only the first 5% of their wealth can have any justification as part of an economic reward system to encourage entrepreneurship and enterprise. And the last 95% of their wealth? It would create much more happiness and opportunity if divided evenly among the citizens of the United States or the world than if they were to consume any portion of it.

But as a rule Bill Gates and company will not consume more than 5% of their wealth. Indeed, I wonder if they will consume even 5%

The rest will remain as perpetual capital, and fuel the consumption of the heirs or charities they designate. In either case the wealth will be spread over hundreds if not thousands of people.

The idea that capitalists are benefiting at the expense of workers is largely unfounded. As DeLong points at latter, skilled workers are benefiting and the expense of the unskilled. This is the problem we need to focus on. This is the problem that needs to command our attention.


Anonymous said...

The rest will remain as perpetual capital, and fuel the consumption of the heirs or charities they designate. In either case the wealth will be spread over hundreds if not thousands of people.

Bill Gates net asset wealth is about as large as the combined wealth of the lowest 40 MILLION households in the United States, so to talk about him spreading it to several hundred or even 'thousands' of people seems a couple of orders of magnitude off the mark.
I also felt you kind of dodged de Long's central point which is that the pay and asset accumulation of the top CEOs in the United States of American is several fold times over more than what is needed to incentivize the same investment behavior.
You are right that it is not completely a zero sum game, but when most (i.e. more than half) of the gains of the past years expansion has gone to the top 1% of households your talk of skilled versus unskilled again kind of misses the point. Bill Gates is certainly very smart, he took risks, and he had a vision; but if it hadn't been him it probably would have been someone else. A good part -- the vast vast part -- of his fortune he owes to being lucky enough to have been in the right place at the right time. Economists refer to such earnings as economic rents, and elementary economic theory of the sort that Brad De Long is pointing out, suggests you can divide those rents up differently without fundamentally altering real economic activities.

In short it is the skilled and WELL SITUATED benefitting at the expense of the skilled but less well situated, as well as the unskilled.

Chris said...

If Gates is not spending even 5% of his income, and the rest is being managed (to maximize its accumulation), is Gates not doing a service to the rest of society by using his considerable money-managing skills (or at least, the people he pays) to make the most dynamic investments possible.

If you believe that smart investments reward not only the investor, but also those who consume the product/service of the smart investment, then Bill Gates is essentially performing a public service.

The question is to what extent its true.

James M. Jensen II said...

I know it's been months since you posted this, but I am very curious about something:

If the extremely wealthy are hoarding their wealth instead of spending it, are they not in effect temporarily reducing the money supply by taking it out of circulation?

It seems to me that if, for instance, he were to suddenly decide to spend it all on apples, demand would shoot into the stratosphere, raising prices for everyone in the market. Eventually, this would level out as the money got spread out, but in the short run you would have a lot of people unable to afford apples.

So, conversely, by hoarding the wealth he is actually doing the market a short-term favor as well as the long-term one you are talking about.